September 24, 2008, should go down in the history books as a day of infamy. And clarity.
That's when President George W. Bush looked into the eyes of anxious Americans and told them they weren't being nearly anxious enough. "America could slip into a financial panic," he warned (or was it threatened?), just hours before Washington Mutual became the biggest bank to fail in U.S. history without generating as much as a fluttered eyelid from blasé depositors (including me). "Millions of Americans could lose their jobs," he said, one week before new federal data showed unemployment unchanged at 6.1 percent, lower than it was for any month between January 1980 and June 1987. "The value of your home could plummet," he added, the same day new August housing figures showed the median U.S. house price to be $203,100. While down $73,000 in real terms from the height of the bubble two years ago, that's still a full 40 percent higher than it was at the beginning of 1997.
Aside from the innumerate hysteria, Bush sketched a worldview in which the federal government is single-handedly responsible for making sure all assets appreciate indefinitely. "The stock market would drop even more, which would reduce the value of your retirement account," he said, as if Americans were forced at gunpoint to invest for their retirement in equities instead of bonds or commodities. "Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college," he said, as if he didn't understand that the financial crisis was triggered in the first place by unprecedented access to easy credit.
If you want to know when this country's political class, even those hailing from the allegedly pro-market Republican Party, lost faith in the single greatest economic organizing principle ever devised by mankind, look no further than the following six terse sentences from Bush's decidedly unpresidential speech: "I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly." Italics mine, to highlight the favored lament of reluctant central planners everywhere.
Bush's laundry list of horror was not predictive; it was conditional. We could avoid the cruel fate of "a long and painful recession" if and only if Congress agreed right now to allocate around $700 billion more in money it doesn't have so the Federal Reserve could use powers it never previously contemplated to buy up huge swaths of "toxic" mortgage-related financial instruments no bank currently wanted to sell (except to the government, at a premium above the market price). The details weren't important; as House Financial Services Committee Chairman Barney Frank (D-Mass.) said at the start of bailout negotiations, "We don't have a choice now of debating whether this is a good or a bad thing." The elite opinion leaders in Washington and New York were nearly unanimous in their contention that only deeply irresponsible "nihilists" (in New York Times columnist David Brooks' phrase) and the "lunatic fringe" of "wing nuts" and "zealots" (The Washington Post's Dana Milbank) failed to recognize the urgent need for massive yet vague reregulation. "The fine points of financial reform can wait," The Washington Post's editorial board thundered. "For Congress, the immediate task is to avert economic disaster."
And it wasn't just the Bush administration and a bunch of newspaper columnists talking imminent collapse. GOP presidential nominee John McCain predicted that should a bailout fail to pass, "the present crisis will turn into a disaster," and "the gears of our economy will grind to a halt." Sen. Hillary Clinton (D-N.Y.) warned that "this is a sink-or-swim moment for America." Many commentators pointed to the 778-point drop in the Dow Jones Industrial Average on September 29, the day the House of Representatives temporarily rejected the bailout package, as proof that (in Milbank's words), "in the Congress of the United States, the insane are now running the asylum." When the Dow dropped 800 points the first full trading day after the bailout bill passed, most of the Dow-drop-proves-it crowd was oddly silent.
Political hyperbole and editorial board do-somethingitis aside, there is no exaggerating the importance of this moment. While congressional Republicans wobbled and eventually caved (see "Atlas Blinked," page 18), the Democrats were ready from day one to cooperate with the Bush administration's power grab. Polls in late September and early October showed the crisis had a beneficial impact on not just Democratic presidential nominee Barack Obama but also a variety of down-ticket Democratic legislators. If the party that cares even less about markets converts anti-market rhetoric into electoral gains, and tops that off with a Democratic president who ran to the economic left of Bill Clinton, Al Gore, John Kerry, and arguably even Howard Dean, we could find ourselves come January with an immediate governing crisis.
But I would suggest that something even deeper is afoot. When a Republican administration arbitrarily (and "temporarily") bans short selling just one decade after Malaysian Prime Minister Mahatir bin Mohamad was globally (and deservedly) mocked for blaming his country's self-inflicted woes on "speculators," when a Republican presidential nominee unleashes retrograde attacks against the "casino culture" of Wall Street "greed," and when a Democratic Congress holds nearly daily hearings suggesting any number of "windfall profits" taxes and forced reductions in private-sector CEO pay, that sound you hear is a fragile consensus shattering and a warning bell clanging in the night.
After the collapse of communism and the attendant discrediting of Marxian economic models, the industrialized world more or less settled on democratic capitalism as the best available option for countries to grow and prosper (see "The Libertarian Moment," page 62). Old Europe slashed government involvement in industry, New Europe rode mass privatization to massive growth, East Asian countries went from emergingmarket "tigers" to full-fledged market economies, and China used markets to yank hundreds of millions up from poverty. One could perhaps be forgiven for thinking the 20th century's great economic argument had been settled.
Well, no more.
In June I read what I thought I'd never see again: a mainstream column, by a mainstream columnist (The Washington Post's David Ignatius), arguing against the effects of airline deregulation, one of the most liberating government acts of the last four decades (see "40 Years of Free Minds and Free Markets," page 28). When reregulation is suddenly on the table even for an industry where market forces have cut prices in half while doubling the customer base, it's time to get back to first principles and fight like hell to secure victories we'd long thought won.
It is times like these that reason magazine was made for, 40 years ago. As we argue throughout this commemorative anniversary issue, many aspects of our lives are considerably better than they were in 1968, but some old debates never die. Now that the historic 2008 bailout-the ramifications of which we'll be sorting out for as long as, if not longer than, those of the equally rushed PATRIOT Act of 2001-has been signed into law, there has rarely been a more fitting time to engage in the basic argument that it is capitalism, not "emergency" intervention from Washington, that makes us freer, more prosperous, and more interesting. We hope we won't be making these same arguments 40 years from now, but we're fully prepared to do so if necessary.
Matt Welch is editor in chief of reason.